The 2 Most Important Beverage Trends Right Now

Just a short article today to highlight two of the most important trends shaping the beverage industry right now.

The first big trend relates to the continued growth in off-premise consumption relative to on-premise.

Some in the industry call this the "Netflix affect" as more people are opting to stay at home and crack a favorite bottle (or two) while catching up on the latest shows. This trend tends to be more prominent within the millennial category which if course is growing in importance to the industry.

Danny Brager, SVP of Nielsen’s Beverage Alcohol practice recently stated:

Drinking at home’ growth is outpacing ‘drinking out of home.’ While both channels are critical, the off-premise continues to be not only significantly larger volumetrically than on-premise, but also the environment currently offering the larger growth opportunities

This trend is supported by new alcohol delivery services such as Drizly and Mini Bar along with more established delivery services such as Instacart and which now offer alcohol in certain markets.

The second big trend relates to "premiumization" within the industry where consumers are opting to consume less quantity, but higher quality products. 

This has led to the new buzzword, particularly in the liquor segment, but is playing out in wine and beer as well.

The days of the daily jug wine and handles of generic vodka are being traded in for more epicurean experiences of small batch craft liquors and family estate wines.

The key question for the industry is - what do these trends mean for my business?

First, we need to recognize that the lifecycle of a particular brand will likely be shorter than in the past.

Consumer preferences are changing at a faster pace and brand loyalty is not as strong, therefore brands will need to become more proactive to stay relevant and portfolio managers will need to manage portfolios like investments - discarding those that underperform and diversifying into emerging brands and categories more quickly.

This is especially important for on-premise retailers where a more diverse, eclectic and dynamic selection will be required to get consumers off the couch.

Second, the already competitive off-premise segment will become tougher with emerging digital channels.

Retailers cannot simply rely on the handful of wine outlets in the neighborhood as the primary  competition - the smartphone that every consumer now has glued to their hand will be the biggest form of competition going forward. 

Savvy retailers will form partnerships and improve their own digital offerings to take advantage of the trend while brands will need to "up" their digital game in order to capture the attention of these new customer acquisition channels.

Finally, the middle tier (importers, wholesalers and brokers) will need to add more value to sustain their position in the industry.

As brands and retailers become more savvy at capturing the consumer's attention through new digital channels, the role of the middle tier will become increasingly commoditized, putting downward pressure on margins.

Middle tier operators will need to highlight service offerings that go beyond just movement of boxes and fulfilling compliance in order to justify their margins. 

While there are many other important trends to pay attention to in the industry, the growing shift towards off-premise and "premiumization" are driven by larger demographic and social forces and will have a long lasting impact.

Why Has "WineTech" Ignored the Wine Supplier-to-Wholesaler Relationship?

This post was based in part on a recent conversation I had with a technology entrepreneur who is interested in developing solutions for the wine industry, but I've had similar conversations over the years on this very topic. 

TL;DR - there has been little innovation supporting the $15B+ annual market of wine that is sold between the wine supplier (i.e., producer or importer of wine) and the wine wholesaler (state licensed distributor), but there is a tremendous opportunity for someone who can develop and market the right product.

Here is how many of these conversations begin...

Entrepreneur: I would like to get your feedback on a great idea I have for a new [app / website] to help wine retailers sell more wine based on [artificial intelligence / machine learning / social data] and we will revolutionize how wine is sold, just like Uber and Airbnb revolutionized their industries!

Me: that is a great idea, but there have been many such attempts and many more that are still playing out. The retailer-to-consumer market segment is fairly saturated with technology products and unless you have a sustainable advantage in customer acquisition, it will be a long hard road ahead.

Entrepreneur: is there a part of the market that is not already saturated?

Me: Yes! While I would say that SevenFifty has the wholesaler-to-retailer segment well covered, there has been very little innovation in the supplier-to-wholesaler tier of the 3-tier system. This segment seems to be largely ignored.

Entrepreneur: that sounds very interesting, I do not know much about that segment of the market, can you tell me about some of the common problems or issues that could be solved with technology?

Me: how much time do you have, because I could go on for hours about that?

Common sense would suggest that by solving a problem, there would be an opportunity to earn a return in relation to the size of the problem solved. Unfortunately, few entrepreneurs are familiar enough with the intricacies of the wine supplier/wholesaler process to even know what problems to solve.

Below is just an initial list of problems that, even today, remain largely manual and inefficient for both wine suppliers and wholesalers.  This is not an exhaustive list, but merely a starting point to demonstrate the opportunity for innovation through technology:

1. Finding New Wine Suppliers - there is not an easy or effective way for a wine wholesaler to find potential suppliers of a given wine that may be available for distribution in their market.

For example, let's say Wholesaler A is looking for a producer of Rioja wines to distribute in Florida. If that distributor is on SevenFifty, they could rule out those brands that are already represented in FL, but what about all the other potential options?

Chances are, Wholesaler A will ask their network for recommendations, look through various wine review publications and/or perhaps search Google. These are generally not very effective, especially once you consider the process of reaching out to the supplier and trying to form a relationship.

There are a few industry publications that offer various postings in a "wanted" format, but those are generally not well followed.

This is a classic problem that can be solved with a "two sided marketplace" business model whereby a non-industry participant sets up an offering that brings together supply (wine suppliers) with demand (wine wholesalers) and creates value by building and maintaining the marketplace. Think eBay or Uber - neither own or sell the goods or services that are transferred between buyer and seller, rather they facilitate the transaction.

2. Finding Potential Distributors - this is just a variation of above, but from the other side whereby a wine supplier searches for a wholesaler to distribute their wines in a given market.

Just like above, there is no real effective way for suppliers to locate distributors so most rely on recommendations and Google.  

This is another problem that can be solved through a two sided marketplace. The value is in the ability to facilitate efficient interactions between suppliers and wholesalers.

3. State Licensing and Compliance - everyone's favorite subject in the industry! 

Let's face it, nobody in the industry enjoys the paperwork of getting licensed to do business in a new market and the various compliance processes that come with it. Yes, Tennessee, with your 4 distinct "markets" - we are talking about you!

While there are firms that can take care of this (for a cost of course), there could be a much more effective way to handle at least the initial setup process, especially if done at the formation of a new supplier-wholesaler relationship.

Once a supplier and wholesaler agree to work together, and if the supplier is not licensed in the State, most of the time the supplier is left to figure out what needs to be done by either asking the wholesaler for guidance (who may or may not give good answers) or sifting through unclear instructions on the State-run website.

Given the many-to-many relationships between the 10,000+ wine suppliers and 5,000+ wholesalers, all it would take is for one well organized tool to figure out the process for each State and simplify it for everyone.

4. Lack of Responsiveness/Payment/Trust Between Wine Supplier and Distributor - the supplier to wholesaler segment is notorious for relationships that can "go dark" at a moment's notice, whereby one side seemingly falls off the grid and cannot be contacted.

This is made worse when one side is in need of information, such as depletion reports or product details, but can be devastating when one side is waiting on payment or product to sustain the business.

In a network where parties in a transaction do not share the same risk or incentive, there is generally value to be provided by a third party to mitigate this asymmetry. Think about financial markets where traders of a financial instrument do not necessarily know each other and a seller of stock would never agree to sell with only the "promise" to pay by the buyer.

In a two sided marketplace, this is often solved through the process member reviews or ratings.  In a more heavily controlled market, often a 3rd party facilitator is used to hold escrow and regulate the behavior of market participants.  The wine supplier to wholesaler segment could conceivably use a combination of both to facilitate a more healthy interaction among participants.

There are many other problems and related use cases (payments for example - see previous post on Blockchain for Wine), but the four listed above are the most common that I hear among the industry.

Now, I will invite everyone to imagine the following scenario:

  • Wine Supplier sets up a comprehensive profile on a well designed website, with contact and product information (perhaps linked to SevenFifty).
  • Wine Supplier then indicates which markets (and wholesalers) they are working with today AND indicates markets of interest where they would be interested in connecting with a new distributor.
  • Wine Wholesaler sets up a comprehensive profile, with contact and existing supplier information along with markets served.
  • Wine Wholesaler indicates product/region categories of interest for new suppliers.
  • Wine Supplier browses for a distributor in a market and finds that Wine Wholesaler is interested in a product that Wine Supplier offers.
  • Wine Supplier clicks to "connect" with Wine Wholesaler and start a message dialogue that is facilitated via email (think LinkedIn messaging).
  • Wine Supplier and Wine Wholesaler agree to form a relationship and this is affirmed on the website (via double opt in), at which point a simple workflow is initiated to both sides outlining the steps for licensing and custom instructions.
  • Wine Supplier and Wine Wholesaler are able to provide regular updates through the website (or mobile app) for actions such as requesting depletion reports, posting invoices, scheduling market visits, etc.
  • Wine Supplier and Wine Wholesaler are able to provide, if desired, a public review of each other for other community members to see.

There are countless additional use cases that I could include in the above scenario, but at this point I hope the potential value of such a solution is clear.

So rather than focus on yet another "me too" app to sell wine to consumers, I would encourage all aspiring #winetech entrepreneurs to really consider the supplier to wholesaler segment.